Welcome back to the fourth and final installment of our series on responsible investing. In this segment, we delve into critical considerations when evaluating companies for investment. From assessing a company’s pricing power to scrutinizing management’s capital allocation strategies, we explore fundamental aspects that can significantly impact investment outcomes. Additionally, we examine the importance of analyzing labor relations, avoiding blind trend-following, and recognizing the value of companies that build ecosystems rather than just products. Finally, we discuss the significance of historical patterns in the stock market and the need to consider alternative investments during challenging market conditions. Join us as we delve into these essential insights to empower you in making responsible investment decisions.

1. There’s Not One Right Approach to Investing

While many pieces of advice about stocks are mentioned above, and many of them are reasonable, if you really want to learn about stocks properly, it is better to start with the textbooks taught in universities. After mastering the fundamentals of modern finance studied in the regulatory framework, it is not too late to read investment-related books. Furthermore, since perspectives on investment vary widely among investors, reading different books may cause confusion due to differing viewpoints. Therefore, it may be better to first lay a foundation in modern finance researched within the regulatory framework before reading investment-related books.

2. Can a Company Determine its Own Price in the Market?

This tip delves into Porter’s Five Forces framework, particularly the concept of having high bargaining power within an industry. Warren Buffett has also touched upon this aspect. The more control a company has over its pricing and the more customers are compelled to purchase its products regardless, the more valuable the company is considered. However, such companies are rare, and seeking them out may be somewhat futile as they are often already dominated by major corporations.

3. Is Management Allocating Capital Effectively?

Most companies experience rapid growth after their inception. Sometimes, this growth rate is so high that they accumulate significant debt. However, there comes a point where they transition into a mature phase and find themselves holding much more cash than they can invest in actual opportunities. It is at this stage that the rationality of management is showcased.

Buffett evaluates whether management is rational at this juncture. If a company simply hoards cash, its stock price may decline, and it becomes vulnerable to hostile takeovers. Therefore, rational management may opt to pay dividends to shareholders, repurchase company shares for retirement, or acquire other ventures. However, Buffett generally views acquisitions negatively. Companies purchased for their growth potential often come at overvalued prices, and acquiring new businesses increases the risk of making new mistakes. Nevertheless, many managers indiscriminately spend surplus cash on acquiring what they believe to be growth companies. From a shareholder’s perspective, it is generally better for a company to focus on shareholder returns within the limits of maintaining competitiveness, rather than engaging in inefficient investments.

4. Is the Company’s Labor-Management Relationship Healthy?

Companies that conceal failures and arbitrarily restructure their skilled workforce are quick to fail. Companies that identify and incorporate skilled practitioners into their management tend to survive longer and provide dividends.

5. Is the Company Blindly Following Trends?

Apple and Microsoft are examples of companies that are unlikely to fail. The reason is that they are not just ordinary companies; they are dominators of ecosystems. They do not sell products; they build ecosystems. People do not love and buy Apple’s iPhone or Microsoft’s Windows just because; they purchase their products to access the ecosystems they have built.

6. History Repeats Itself

Ultimately, the stock market, like any other human endeavor, experiences ups and downs influenced by the times. Additionally, global capital is undoubtedly expanding. As long as the world does not collapse due to pandemics or nuclear war, industrialization in the developing world and the development of previously untapped resources due to technological limits will expand overall capital. Even if the stock market becomes a mere piece of toilet paper, it will not be a problem. Most investors commonly misunderstand that investing is a lifelong journey, not an immediate profit-making endeavor. That is what hedge funds and investment banking conglomerates do.

7. When the Stock Market is Challenging, Consider Alternative Investments

When navigating challenges in the stock market, considering alternative investments can be a prudent strategy to diversify one’s portfolio and mitigate risk. Alternative investments, such as real estate, private equity, hedge funds, commodities, venture capital, private debt, art, collectibles, and cryptocurrencies, offer opportunities for potential returns while often having low correlation with traditional stocks and bonds. These assets provide investors with avenues for diversification beyond the stock market, helping to protect against market downturns and enhance overall portfolio performance. However, it’s crucial to conduct thorough research, assess risk tolerance, and consult with financial professionals to ensure that alternative investments align with one’s investment objectives and long-term financial plan. By incorporating alternative investments into a diversified portfolio, investors can potentially enhance returns and manage risk more effectively in various market conditions.